Doctors, HMOs, ERISA, and the Public Interest After Pegram v. Herdrich

The Employee Retirement Income Security Act of 1974 was enacted in the wake of highly publicized pension disasters in order to protect employee pension rights. Born as a piece of pro-worker legislation, it initially was criticized by business groups as a cause of bureaucratic arteriosclerosis that was worse than the disease of pension failures. Even worse, it prompted many employers to consider dispensing with pension plans altogether rather than struggle with the administrative and financial obligations of ERISA. Business, labor, and the public all complained about the law\u27s complexity. It even became something of a national joke as regulators took years to promulgate regulations for administering the statute. In short, ERISA seemed to have something to annoy everyone. A silver lining of sorts was that, at least for the first ten years of the law\u27s existence, most discussions were confined—as was virtually all congressional discussion at the time of ERISA\u27s enactment—to pensions. At first, no one considered that ERISA related to the delivery of medical services or to the collection of employer-provided insurance benefits. Eventually, alert defense lawyers argued that the broad preemption language in ERISA prevented pension plans from being subject to inconsistent state regulation. Pressing a broad literal reading of the preemption language, they found a willing audience in the U.S. Supreme Court. For example, Pilot Life Insurance Co. v. Dedeaux held that an aggrieved worker attempting to collect disability insurance benefits was unable to make a state law-based claim of insurer bad faith because it was preempted by ERISA. Two years earlier, in Massachusetts Mutual Life Insurance Co. v. Russell, the Court held that ERISA, which created a private right of action against ERISA fiduciaries under the statute, entitled the successful claimant only to the benefits owed plus reasonable counsel fees; there was no right of consequential, extra-contractual, or punitive damages arising from the improper or untimely processing of benefit claims. In the ten years following Pilot Life, lower courts in large part continued to take a broad view of ERISA preemption as applied not only to insurers but to managed care organizations such as health maintenance organizations and to physicians working under the auspices of managed care, in many cases insulating them from state law tort claims. In 1993, the U.S. Supreme Court extended ERISA\u27s limited remedy for improper claims handling to suits against nonfiduciaries as well. A covered employee might obtain denied benefits and counsel fees through litigation under ERISA but was barred from consequential and punitive damages. The traditional business-based grumbling about ERISA was replaced by consumer-oriented complaints, as many were stunned to find that a statute ostensibly enacted to protect workers was being used by the courts to strip them of rights that they possessed prior to ERISA